Getting an interest-only loan

Is an interest-only mortgage loan for you? While the low monthly payments are enticing, they simply may not be beneficial to some. Before diving in to an interest-only loan, assess your lifestyle and read through all the details of the mortgage.

Understanding interest-only loans

Interest-only loans are fairly straightforward. Monthly payments, usually in the first years of the mortgage, only require that you pay the interest portion of the payment. Interest-only mortgages are for set periods, often around five to seven years, and allow you to use the extra savings in principal payments for other things. The interest-only portion is only an option; you can still pay off the principal while in an interest-only mortgage. When the term of the interest-only period ends, the original mortgage agreement moves back in to play.

When you should

An interest-only loan for a mortgage can be very beneficial to some. If you're just entering a potentially lucrative field, such as medicine or law, and believe you'll net a higher income in the coming years, an interest-only mortgage will allow you to save during those initial years.

Business owners may benefit from these types of loans due to their fluctuating incomes. Interest-only loans allow you to maximize cash flow at all times, a benefit that many business owners require.

Executives with income based on bonuses and commissions benefit as well. When bonus time comes around, you can pay off the principal in a lump sum.

You may also profit from an interest-only loan if you have the discipline and financial savvy to invest the extra savings. Get advice and calculations on interest-only loans with Bankrate's interest-only payment calculator.

When you should not

You might not want to take out an interest-only loan if you're looking to buy a home and take out a large mortgage when you only earn a regular wage. Payments often jump tremendously after the initial interest-only period is over, and you may not be able to afford them. Find a home that you can afford and that fits with your budget. Bankrate's mortgage loan calculator can help you figure out an amortization schedule.

News alert Create a news alert for "mortgage"


          Connect with us


Holden Lewis

Brexit drives mortgage refinancing boomlet

Lenders say they have seen an increase in refinance applications since the United Kingdom voted to exit the European Union.  ... Read more


Connect with us